The government said the number of newly laid-off U.S. workers signing up for unemployment benefits posted an expected drop last week, but consumer spending fell in March for the first time in three months.

The Labor Department says new applications for unemployment insurance fell to a seasonally adjusted 631,000 last week from the prior week's 645,000, which was revised slightly higher from the government's initial estimate.

Economists expected a small increase in new claims.

But the number of people continuing to draw unemployment benefits jumped to 6.27 million, highest on records dating back to 1967 and steeper than economists expected.

In the second report, the Commerce Department says consumer spending dropped 0.2% in March, worse than the 0.1% decline that economists had expected.

Incomes, reflecting the continued wave of layoffs, dropped 0.3%, worse than the 0.2% dip that had been expected.

New unemployment filings— as opposed to the number of people who remain on unemployment rolls — are closely tracked by economists for clues about the future direction of the economy. Analysts want to see a sustained decline in new applications as a sign of improved conditions.

Although last week's drop in new jobless filings was welcome, the level of claims remains elevated and signals a troubled jobs market. The labor market usually doesn't recover until well after a recession has ended. That's because companies won't want to ramp up hiring until they feel certain any recovery has staying power.

The record number of continued claims suggests that many laid-off workers are having trouble finding new jobs.

As a proportion of the work force, the total jobless benefit rolls are the highest since late December 1982. The continuing claims data lag initial claims data by a week.

Besides the continued claims, the report said there were 2.4 million people receiving benefits, as of April 11, under an extended unemployment compensation program enacted by Congress last year. That provides an additional 20 to 33 weeks on top of the 26 weeks typically provided by states.

Workers and companies have been hard hit by the recession, which began in December 2007. It has snatched 5.1 million jobs and pushed the unemployment rate to a quarter-century high of 8.5%. It is expected to top 10% by early next year before it starts to slowly drift downward.

Companies have laid off workers and resorted to other cost-saving measures to survive the recession, which has eaten into sales and profits.

The income and spending report said after-tax incomes were flat in March, leaving the personal savings rate at 4.2%, an improvement from a year ago when the rate was near zero. Households have been cutting spending and boosting savings, worried that they may need emergency funds in the face of continuing layoffs.

The 0.2% drop in spending was the first decline after two consecutive increases. Spending shot up 1.1% in January, largest monthly jump in nearly five years, but that followed six monthly declines.

The fact that spending turned negative again in March is a worrisome sign about future economic prospects. Consumer spending in the first quarter of the year grew at a 2.2% annual rate after two consecutive quarters of declines.

However, many economists believe spending will dip back into negative territory in the current April-June period, further delaying a rebound from the recession. Economists closely watch consumer spending because it accounts for 70% of economic activity.

A price gauge tied to consumer spending showed a modest 0.2% increase, excluding food and energy, and a 1.8% increase over the past year. The country's deep recession, on its way to becoming the longest in the post World War II period, has dampened price pressures.

The Federal Reserve, which last December slashed a key interest rate to near zero to fight the downturn, announced on Wednesday that it would keep rates low for the foreseeable future and is prepared to use other means to jump-start the economy.

The economy, as measured by the gross domestic product, fell at an annual rate of 6.1% the first three months of the year after a 6.3% plunge in the fourth quarter. It marked the worst back-to-back declines in GDP in a half century.

Even with the expectation that consumer spending could turn negative again in the second quarter, economists are looking for the GDP decline to slow to perhaps a 3% fall, reflecting the fact that businesses will not be slashing inventories at such a rapid pace as they did in the first three months of the year. Analysts are looking for GDP to be only slightly negative in the third quarter and then turn positive in the fourth quarter.

The main reason economists have gloomy expectations about spending are the continuing job cuts.

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